SUPPLY AND DEMAND
Household
- basic consumer unit in economy
- how to acquire and spend income
Firms
- basic unit of production
- conversion of inputs into different and more valuable outputs
- choosing correct combination of inputs and the correct level of output
Economic system - allocation and distribution of goods and services
- Government - public
- Market economy - private
Basis for Market System
- economic self interest
- exchange of goods and services for a set price
- exchange is voluntary - agreement on exchange
- consumer sovereignty dictates demand
- competition for allocation of goods and services
The Market System
- multiple markets - housing, automobiles, food, entertainment
- size of market - global, regional, local, neighborhood
- exchange is limited by supply and demand
- circular flow of inputs and outputs
Demand

The Law of Demand
- quantity demanded depends on price ceteris paribus
- negative relationship for most goods
- inferior goods - some goods (such as beans and rice) are purchased in smaller quantities when income rises above a certain level
Change in quantity demanded affected by price - movement along demand line
Change in demand - shift in demand line
- increase moves line right
- decrease moves line left
Supply

The Law of Supply
- quantity supplied depends on price ceteris paribus
- positive relationship
Change in quantity supplied affected by price - movement along supply line
Change in supply - shift in supply line
- increase moves line right
- decrease moves line left
The Law of Supply and Demand

equilibrium price
- price at which supply is equal to demand
- quantity sellers wish to sell is exactly equal to the quantity buyers wish to buy

- price above equilibrium--then less is sold; sellers try to reduce
price
- price below equilibrium--then more is sold; buyers bid up the
price
An economic approach to the cocaine problem
or
Why the "War on Drugs" is doomed to failure
- Government intervention to reduce supply, not demand - supply side economics
- Existing/expanding demand forces price up
- Demand is not dependent on price, because there is no substitute good (coffee and tea)
- Higher prices encourage more firms (smugglers) to enter the market
- the higher the price, the more firms willing to take risk
- higher prices provide increased profits as cost of production remains fairly constant
Back to
the lecture page
or
Go to next lecture